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What is net invested capital?

Net invested capital is the total amount of money put into a portfolio, minus the amount taken out of it. It is the baseline a portfolio's gain is measured against: the value of a portfolio on its own says nothing about how much of it is profit and how much is simply savings.

The formula

Net invested capital=∑Deposits−∑Withdrawals\text{Net invested capital} = \sum \text{Deposits} - \sum \text{Withdrawals}

and the portfolio's gain in euros is:

Gain=Current value−Net invested capital\text{Gain} = \text{Current value} - \text{Net invested capital}

Dividends and interest are not deposits: when they are paid into the portfolio they are part of the gain, not new capital. Fees and taxes paid from the portfolio are not withdrawals either; they lower the value, and with it the gain.

A simple illustration

Over several years, an investor deposits €40,000 in total, withdraws €5,000 to buy a car, and the portfolio is worth €48,000 today.

Net invested capital=40,000−5,000=35,000\text{Net invested capital} = 40{,}000 - 5{,}000 = 35{,}000 Gain=48,000−35,000=13,000\text{Gain} = 48{,}000 - 35{,}000 = 13{,}000

Of the €48,000, €35,000 is the investor's own money and €13,000 is what that money earned.

Net invested capital vs. cost basis

The two are easily confused:

  • Cost basis is what was paid for the investments currently held. It changes with every purchase and sale, and it is what the gain on each individual position is measured against.
  • Net invested capital is the money that crossed the boundary of the portfolio: in from a bank account, or out to one. Buying and selling inside the portfolio does not change it.

When a stock is sold at a profit and the proceeds are used to buy another one, the portfolio's cost basis rises, but its net invested capital stays the same.

How to read it

  • Gain as a percentage. Dividing the gain by the net invested capital shows how much the money has grown in total, but it ignores timing: a euro invested ten years ago and a euro invested last month count the same. The money-weighted return corrects for that.
  • A value below net invested capital means the portfolio has lost money overall, even if its value keeps rising thanks to new savings.
  • Tracking both over time separates the two engines of a growing portfolio: saving more, and earning more on what has been saved.

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